Morgan reports sub-prime losses
Morgan Stanley, the second-biggest U.S. securities firm, said Wednesday that its sub-prime mortgages and related securities lost $3.7 billion in the last two months after prices sank further than traders expected.
The decline may cut fourth-quarter earnings by $2.5 billion, the New York-based company said, adding that the figure could change by the end of this month. Analysts expect, on average, a $1.9-billion profit, according to a Bloomberg survey.
Competitors such as Merrill Lynch & Co. and Citigroup Inc. also have reduced the value of their mortgages and bonds backed by the loans. The companies are getting stuck with losses after a surge in U.S. mortgage defaults this year prompted investors to shun the securities as well as other high-risk, high-yield debt.
“The dislocation in the market has been quite severe. Liquidity has dried up,” said Colm Kelleher, Morgan Stanley’s chief financial officer. “You need to see some of these [large stakes] reduced, you need to see buyers coming in, you need to see an easing of liquidity in the market.”
Kelleher said he now estimated that the credit markets would take three or four quarters to recover, instead of the one or two he expected when the firm reported third-quarter results on Sept. 19.
Part of the losses stemmed from derivative contracts the firm’s proprietary trading unit wrote earlier in the year, Kelleher said. The traders anticipated a decline in the value of sub-prime securities, and the contracts made money for the firm in the second quarter, he said. They started losing money when prices fell below the level the traders had anticipated, Kelleher said.
The people responsible for the losses no longer work at the firm, said Morgan Stanley spokeswoman Jeanmarie McFadden. She declined to name them.
Concerns about potential write-downs at Morgan Stanley have pushed the stock lower this week, bringing the year-to-date decline to 24%. Wednesday the stock fell $3.32, or 6.1%, to $51.19.
On Tuesday, analysts predicted Morgan would write down $3 billion to $6 billion in assets.
